Eggert v. Wasatch Energy Corp.

• Decision Date: 16 April 2004
• Docket Number: No. 20010786.,20010786.
• Citation: 94 P.3d 193,2004 UT 28
• Parties: Roger K. EGGETT, Jr., Plaintiff and Respondent, v. WASATCH ENERGY CORPORATION, a Utah Corporation, Defendant and Petitioner.
• Court: Utah Supreme Court

94 P.3d 193

2004 UT 28

Roger K. EGGETT, Jr., Plaintiff and Respondent, v. WASATCH ENERGY CORPORATION, a Utah Corporation, Defendant and Petitioner.

No. 20010786.

Supreme Court of Utah.

April 16, 2004.

Rehearing Denied June 10, 2004.

Perrin R. Love, Salt Lake City, for plaintiff.

Merrill F. Nelson, Eric C. Olson, Salt Lake City, for defendant.

On Certiorari to the Utah Court of Appeals

DURHAM, Chief Justice:

¶ 1 We granted certiorari in this case to review the court of appeals' decision affirming a final judgment awarding plaintiff Roger K. Eggett, Jr. (Eggett) $147,559.96, plus attorney fees. We affirm.

BACKGROUND

¶ 2 In 1993, Eggett formed Wasatch Energy Corporation (Wasatch) to market and distribute natural gas. Two years later, Eggett and two Wasatch employees entered into a Shareholder Agreement, which set forth the shares allotted to each, with Eggett as the majority shareholder. The Agreement provided that if a shareholder left Wasatch, the remaining shareholders could purchase the departing shareholder's stock. The purchase price would be the book value of the departing shareholder's stock if he left voluntarily and par value if the shareholder was terminated for cause. The Agreement defined par value as the original price the shareholder paid for the stock, and book value as the company's book value multiplied by the departing shareholder's percentage interest. Company book value was to be determined by Wasatch's audited financial statements, which were to be prepared in accordance with generally accepted accounting principles (GAAP).

¶ 3 In 1997, following a series of disputes with Wasatch, Eggett tendered his resignation. At that time Eggett remained the largest shareholder in Wasatch, with an ownership interest of 36.5%. Eggett offered to sell his stock to the remaining shareholders for book value.

¶ 4 After Eggett tendered his resignation, Wasatch terminated Eggett for cause, and gave him a check for $1,217, the par value of his stock. When Eggett refused the check, Wasatch cancelled his shares on its books.

¶ 5 Eggett brought suit against Wasatch, claiming (1) breach of his Employment Agreement with Wasatch, (2) breach of the Shareholder Agreement, and (3) breach of the covenant of good faith and fair dealing. Eggett sought additional compensation from Wasatch for the period beginning January 1, 1997, through his effective resignation date. He also sought to recover the book value of his stock, alleging that his termination for cause was a "sham."

¶ 6 At trial, Eggett testified that to determine the book value of his shares, "you take the [book value] of the company and you multiply it by my ownership interest, which was 36.5%, so we [first] have to determine the [book value of] the company." Wasatch's audited financial statements indicated a company book value of $75,452, and Wasatch therefore argued that the book value of Eggett's shares was $75,452 multiplied by Eggett's 36.5% ownership interest, or $27,540.

¶ 7 Eggett, however, claimed that Wasatch had manipulated its financial statements in bad faith to reflect a company book value that was artificially low. Eggett claimed that after he left Wasatch, management changed its policy regarding the length of time uncertain receivables would be held in a "suspense" account. The policy, Eggett testified, had always been to hold such receivables in a suspense account for one year and, if they were not the subject of dispute during the one-year holding period, to include them in company book value at the end of that year. Eggett testified that after his departure, Wasatch management changed the holding period to two years in order to avoid including certain receivables in company book value, thereby depressing the value of Eggett's shares. At trial, Eggett was allowed to present evidence that company book value should be adjusted to include (1) a $283,000 reserve for anticipated losses on a "swap contract" which had not occurred, (2) $296,252 for suspense account items, which would have been included in company book value under the historical one-year holding period, and (3) $45,553 for a disputed purchase contract. Thus, Eggett maintained, company book value should have totaled $699,778. Eggett argued that the book value of his shares (36.5% of $699,778) was therefore $255,419.

¶ 8 Special Verdict Question Number 5 asked the jury the following: "[W]hat was the `book value' of Wasatch Energy as defined by the Shareholders Agreement?" The jury's written response was "$135,671.96." Upon receiving that response, the trial court questioned the jury and discovered that the verdict actually represented the book value of Eggett's shares, not the total company book value of Wasatch Energy. Accordingly, the court entered judgment for Eggett in the amount of $135,671.61 for the book value of Eggett's shares of stock, $11,888.35 for "additional compensation," and over $60,000 in costs and attorney fees.

STANDARD OF REVIEW

¶ 9 Wasatch presents three issues for our review: Whether the court of appeals erred in affirming the trial court's (1) decision to admit Eggett's evidence concerning company book value; (2) decision to question and clarify the jury's verdict; and (3) award of attorney fees on the ground that Wasatch failed to marshal the evidence on this question on appeal. We review the court of appeals' decision for correctness, which "turns on whether it accurately reviewed the trial court's decision under the appropriate standard of review." Clark v. Clark, 2001 UT 44, ¶ 8, 27 P.3d 538.

¶ 10 The court of appeals applies an abuse of discretion standard of review in determining whether a trial court has properly admitted evidence, Gorostieta v. Parkinson, 2000 UT 99, ¶ 14, 17 P.3d 1110, as well as in determining whether a trial court has properly questioned a jury regarding its verdict, see Jorgensen v. Gonzales, 14 Utah 2d 330, 383 P.2d 934, 935-36 (1963)

(stating the trial court acted "within its prerogative" by "question [ing] the jury foreman about the possibility of a quotient or chance verdict"); see also Romano v. U-Haul Int'l, 233 F.3d 655, 671 (1st Cir.2000) ("The standard of review for a determination of resubmission of special verdict questions is for abuse of discretion."); Unit Drilling Co. v. Enron Oil & Gas Co., 108 F.3d 1186, 1192 (10th Cir.1997) ("[I]t was an abuse of discretion for the trial court to refuse to ask the jury to clarify its verdict."). The court of appeals does not review the trial court's factual findings where the party challenging those findings fails to marshal the evidence. Instead, the court of appeals must "assume that the record supports the findings of the trial court." Moon v. Moon, 1999 UT App 12, ¶ 24, 973 P.2d 431 (internal quotations omitted).

ANALYSIS

I. ADMISSIBILITY OF EGGETT'S EVIDENCE OF COMPANY BOOK VALUE

¶ 11 According to the Shareholder Agreement, company book value was to be determined by the audited financial statements prepared in accordance with GAAP. The pertinent audited financial statements indicated a company book value of $75,452, and it is undisputed that the book value of Eggett's own shares is 36.5% of whatever is the company book value. Wasatch therefore argues that Eggett is entitled to 36.5% of $75,452, or $27,540. The trial court, however, allowed Eggett's evidence showing a higher company book value. The court of appeals affirmed, holding that such evidence was admissible under Eggett's claim for breach of the covenant of good faith and fair dealing and that the trial court did not abuse its discretion in admitting the evidence. Wasatch argues before this court that the court of appeals erred in applying an abuse of discretion standard of review because the issue was one of contract interpretation, not one of admissibility of evidence.

¶ 12 The court of appeals correctly applied an abuse of discretion standard of review. The issue before that court was whether the trial court properly admitted Eggett's evidence of book value under his claim for breach of the covenant of good faith and fair dealing, not whether the trial court properly interpreted the Shareholder Agreement.

¶ 13 Extrinsic evidence is generally not admissible to vary unambiguous terms in a contract. See, e.g., Winegar v. Froerer Corp., 813 P.2d 104, 108 (Utah 1991)

("A court may only consider extrinsic evidence if, after careful consideration, the contract language is ambiguous or uncertain."). Here, however, Eggett argues he has filed two separate claims — one for breach of the Shareholder Agreement, another for breach of the covenant of good faith and fair dealing — and that his evidence of book value was admissible to prove his breach of covenant claim regardless of whether or not it would be admissible under his claim for breach of the Shareholder Agreement.

¶ 14 An implied covenant of good faith and fair dealing inheres in every contract. See, e.g., CIG Exploration, Inc. v. State, 2001 UT 37, ¶ 19, 24 P.3d 966

; Malibu Inv. Co. v. Sparks, 2000 UT 30, ¶ 19, 996 P.2d 1043. Under the covenant of good faith and fair dealing, both parties to a contract impliedly promise not to intentionally do anything to injure the other party's right to receive the benefits of the contract. St. Benedict's Dev. Co. v. St. Benedict's Hosp., 811 P.2d 194, 199 (Utah 1991). A violation of the covenant is a breach of the contract. Id. at 200 (citing Beck v. Farmers Ins. Exch., 701 P.2d 795, 798 (Utah 1985)). Extrinsic evidence may be admissible to prove a claim for breach of the covenant of good faith and fair dealing. For example, in Olympus Hills Shopping Center, Ltd. v. Smith's Food & Drug Ctrs., Inc., 889 P.2d 445 (Utah Ct.App.1994), the court of appeals held that the trial court had not abused its discretion in admitting extrinsic evidence to prove a claim for breach of the covenant of good faith and fair dealing, even though such evidence was not admissible to vary the terms of the lease contract. Id. at 454,...